Friday, 25 September 2015

Thoughts on "Diamond are a sham..." and are Diamond Rings a Financial Mistake


Came across an interesting article by Robin Dhar titled "Diamonds are a sham and It's Time We Stop Getting Engaged with Them". It is interesting to learn when we buy a diamond ring; more than 50% of its value is lost as soon as we leave the store. Imagine learning that the $10,000 diamond ring you had bought yesterday is only worth $4,000 in resale value today. That's worse than buying gold or silver which only loses 5-10% of its value.

Hence, the diamond ring is perhaps the biggest financial mistake, ranking higher than owning a car - a depreciating asset but with benefits of convenience.

In addition, it is an eye opener to learn diamonds are not as rare as the price may imply. They are expensive due to the marketing delusion that “diamonds are forever” and the monopolistic nature of the diamond industry where companies work to restrict the supply of diamonds sold to the market. Furthermore, there are synthetic diamonds which cost a fraction of natural diamonds. And is something the common woman on the street is unable to distinguish from natural diamonds (unless she owns a laboratory). You can read here about synthetic diamonds.

Challenging Societal Norms

What mystifies me is how De Beers had marketed diamonds and in the process ingrained into us that the Diamond is a symbol of love and social status:

"It is essential that these pressures be met by the constant publicity to show that only the diamond is everywhere accepted and recognized as the symbol of betrothal."  and
"Promote the diamond as one material object which can reflect, in a very personal way, a man's ... success in life." 

This phenomenon was only a recent campaign in 1938. But with the invention by De Beers that diamond is essential in courtship, males have unwittingly parted ways with a large chunk of their wealth for a ring which loses more than 50% of its value upon leaving the shop. A brilliant marketing gimmick by De Beers.

Similarly in Singapore, it is a norm that we turn to a financial adviser or banker to grow/ protect our wealth. However, if one stops to think, these parties may not be the best. This is because Singapore’s wealth management industry is dominated by commission based agents who rely on the sale of financial products for salary/profits. There are very little fee-based financial advisers. As a result, there is a conflict of interest where the highest commission product for them may turn out to be the worst financial product for you (e.g. ILP). In fact, I have written how even whole life insurance is not optimal. We can create our own product which is likely to provide a better return than whole life but it gives very little commission to agents.

This is probably why many Singaporeans have difficulty saving for retirement. The adherence to societal norms results in financial mistakes that drains our savings that otherwise could be invested in better assets which will compound over time.

3 comments:

  1. What you describe is a typical case of conformity bias which causes us to do foolish things.

    My question is: Wouldn't our fiancee love us even more when we are upfront with her about our frugal nature (fake diamonds are 99% cheaper and look the same)? When we show our strong will by questioning conformity and not following the herd? And by explaining that the act of giving is much more valuable than the pure value of the gift?

    In case her love still does not grow after all those reasons, she might not be the ideal partner for your hike on the path to financial freedom. Ahem, I better get going now ....

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